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Presentation/PPT
27/08/2022
The nature of the firms working capital management policies.
The focus here is for you to operationalise the issues that will be discussed in Lecture 9, and use the annual report information to outline (with explanation and justification) the working capital stance (policies) employed by Fortescue Metals Group Limited. This is based on identifying:
Firstly, their current asset investment policy, which relates to the types of current assets they invest in and the magnitude of current asset investment relative to requirements and the level of current liabilities.
Such as do they hold large amounts of cash, liquid assets, inventory or other current assets?
Do they hold large proportions of current assets relative to current liabilities and total assets? Can you classify their current asset investment level as representing a fat cat or lean-and-mean strategy, for instance?
Secondly, their overall working capital (current assets and permanent assets) financing policy, which relates to how Fortescue Metals Group Limited funds their temporary and permanent asset requirements.
3.
Do they employ a maturity matching, aggressive or conservative working capital policy, and what are the impacts of the observed policy choice? This could be assessed in a range of ways, such as comparing current asset and current liability levels and comparing permanent asset (such as property, plant and equipment) level with long-term financing sources (such as long-term debt and equity). If you want to evaluate this quantitatively, then you might think about calculating relevant liquidity and activity ratios and other indicators such as the firms cash conversion cycle (CCC).
Has there been modification to these policies and how might this relate to changes in other firm attributes and performance?
Major sources of information:
The Consolidate Statement of Financial Position (balance sheet) in the 2015 Annual Report provides an overall picture of Fortescue Metal Group Limiteds asset and liability structure (both current and non-current). The notes associated with the different asset and liability items can be reviewed for more specific detail about these items.
The Consolidated Statement of Cash Flows and the Consolidated Income Statement provide information about the level of borrowing costs (interest expenses) and financing activities, which tells you something about whether financing costs and sources of financing are changing.
2) Determine the cost of the sources of costly-finance employed by Fortescue Metals Group Limited and use this information to determine their weighted average cost of capital (WACC)
This requires you to determine the cost of the various sources of short- and long-term finance that Fortescue Metals Group Limited uses, and to put this information together to calculate the firms weighted average cost of capital (WACC). This information is readily available in the annual report documentation:
The 2015 Annual Report document relating to borrowings and financial lease liabilities provides detailed information (including types, amounts and cost) of the various types of interest-bearing or costly sources of debt finance used by the firm.
Other information is available within the Annual Report and the research project information to determine Fortescue Metals Group Limiteds current cost of equity capital.
4
Also need to determine the various finance component weightings and correctly incorporate taxation into any WACC calculations that you perform. Before-tax costs are provided in, or can be calculated from.
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